Britain's answer to Warren Buffett backs the biotech sector in new investing book

He is a marathon-running polymath with the Midas touch, whose investment funds attract the seriously moneyed. Yet despite being revered by some as Britain’s answer to ‘Sage of Omaha’ Warren Buffett, investor and serial entrepreneur Jim Mellon is modest and unassuming.

He chats with wit and candour about most things in life, including his failures. ‘I bear the scars of those poor investments like anyone else,’ he admits. ‘I’m a little impulsive.’

An £11million loss on German real estate bears witness to this, but there have been many others, he reveals.

Cracking the weaith code: In his book Jim Mellon looks at the opportunities arising from the the melding of traditional pharmaceuticals with biotech

It’s a stunning admission for the
master investor, worth more than £500m, who burnished his reputation as a
businessman and stock picker in fund management as founder of listed
Charlemagne Capital and Asian mining group Regent Pacific.

Today he is a portfolio entrepreneur running The Burnbrae Group – a private landlord in Germany and the Isle
of Man – as well as sitting on the board of bank Manx Financial and
owning the Sleepwell chain of hotels.

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He gives the impression of lucky
amateur, which he is not. He modestly credits his huge success in mining
investment to friend and business partner Stephen Dattels, and says he
fell into the world of fund management rather by chance after leaving
Oxford in the late 1970s.

Perhaps his greatest individual
investing success since then has been UraMin, a uranium miner. It was
set up with $100,000 of seed capital and sold in 2007 to French nuclear
power giant Areva for around £1.6billion.

In the process Mellon and co-founder Dattels made an estimated £80million and £100million respectively.

PERSONAL ACCOUNT: 'HOW I AM BACKING THE BIOTECH BOOM'

I took the plunge into biotech in April, writes This is Money Editor Andrew Oxlade.

I invested 7 per cent of the money in my Self-invested Personal Pension in the Biotech Growth Trust.

My investment has already grown by 17 per cent.

And its not a short-term wonder, Biotech Growth's historic performance is phenomenal.

According to figures collated by the the Association of Investment Companies, for the end of June, it is the best performing investment trust of any type over one (up 42 per cent) and five years (up 151 per cent). And that was during a time of terrible turbulence for the stock market.

It has achieved this by taking big risks, punting on minnow companies, mainly in the US, on the hope their discoveries pay off.

There's no guarantee they can keep this breakneck growth going.

But the trust is run by some exceptionally bright people with a thorough understanding of the industry's technology. Manager Richard Klemm, for example, has a Ph.D. in molecular biology from MIT (the Massachusetts Institute of Technology).

The cost is also relatively low for a specialist fund. The management charge is 0.65 per cent a year although a performance fee is added on - something we are not keen on. But it still means that the total expense ratio (TER)* is just 1.29 per cent.

One downside is that investment trusts have a slightly odd structure that means you usually buy at a 'discount' to the total value of the assets in the portfolio (most trusts trade at a 5 per cent to 10 per cent discount). The Biotech Growth Trust, however, has traded at a slight premium. That premium could slide to a discount if performance of the manager came off the boil.

But investors should treat this sort of fund as a buy and hold for the long-term. The discount/premium factor is minimal after 10 or 20 years of performance.

Other trusts in the sector include International Biotechnology (2.19% TER), Worldwide Healthcare (1.08% TER) and Polar Capital Global Healthcare Growth & Income (1.25% TER). [Find out more - http://www.theaic.co.uk]

Among unit trusts and Oeics - funds that pay sales commission and are more commonly pushed by IFAs and fund brokers - there is Axa Framlington Biotech (1.93% TER) and Pictet (2.01% TER).

Backing biotech is very high risk.

Advisers would only ever recommend dedicating a tiny amount of even high-risk portfolios, if at all.

Investments can fail and it is possible that the whole sector has been over-hyped, the Nasdaq Biotech index is up 55 per cent in the past year against a 20 per cent rise for the wider US stock market.

It may be due for a short-term correction but as Jim Mellon points out, the longer term story is compelling.

* TERs give a far more accurate indication of cost than the 'annual management charge' often quoted by the industry.

It was a big theme investment (Mellon
refers to these big ideas as money fountains); one where the pair
rightly predicted that the move from fossil fuels to renewable energy
would not work without a nuclear component.

Of course new nuclear meant a
requirement for uranium, which was in short supply in 2005 when UraMin
was set up. ‘We in our lives need a few money fountains, which come from
big ideas,’ says Mellon. It sounds like rather cryptic advice from a
fortune cookie.

‘We had a meeting of minds on this. There was a lot of focus on green energy at the time as there is now,’ he explains.

‘But there is a gap between the renewable energy and the fossil fuels. Nuclear seemed to be the way to go.

‘Uranium had been down in the dumps
for years. Steve had a very good prospect in uranium that we ended up
selling to the French government.’

It is a deal Areva probably regrets bitterly after a huge write-down on the value of UraMin.

We meet not to discuss Areva’s
problems, or former glories, but Mellon’s latest big idea – the next
money fountain. It is biotechnology, or bio-pharma, he corrects. This
new-fangled term describes the melding of traditional pharmaceuticals
with biotech.

Whatever its name, biotech is not associated with making money here in the UK, though it is pretty good at burning through cash.

Mellon points to the US success
stories, outlined in his new book Cracking the Code, written with
long-time collaborator Al Chalabi.

It is also where he is currently
investing the Mellon millions (privately that is, his expertise doesn’t
yet extend to running a fund).

The thesis is that today’s super-computers are helping unlock the mysteries of the human genome.

As this quiet revolution continues,
so these giant processors will begin to provide the keys to treating
cancer, obesity and age-related diseases such as Alzheimer’s.

The book was Mellon’s unique method
of addressing a very tough subject matter, allowing him to build up a
knowledge base and a degree of understanding to inform his investment
decisions.

To that end, he bought an apartment
in San Francisco, the epicentre of the industry, and got to know the
companies, the issues and the people.

‘The book opened a lot of doors,’ Mellon confides. ‘It has been really helpful in learning all about the sector.

‘As a private investor, why would a company see me? I might put in $1-$2million. That’s not a lot of money to them. They want to see the institutional
investors and the private equity. But because I was writing the book it
has helped a lot gaining entry.’

Cracking the Code paints a Utopian
vision of an era in which people will routinely live to 120,
disease-free and able to enjoy their golden years.

These assertions, he says, are based
on good science. ‘Man has been presented with a map of his own existence
in the form of the human genome. It is like having a book that you don’t understand and you can’t read. The computing power has caught up – and very, very fast.

‘And by the way you can have your
whole body sequenced and get the results back in 10 days at the cost of
about $1,000. The first sequencing cost about $5billion.

‘The reading of that sequence is going to give all sorts of medical benefits.’

Genetic manipulation will remove
faulty genes, and soon we’ll be able to culture replacement limbs, while
the fight against killer ailments will be aided by personalised
medicine. Already inroads are being made in the field of oncology, with
survival rates of 80 per cent or better compared with 50 per cent just a
couple of decades ago.

Developments in diagnostics (early
warnings of cancer in other words) will push that figure even higher,
while progress is rapid in anti-obesity drugs and heart ailments.

‘Life expectancy for someone born today is 100,’ says Mellon.

‘How does life expectancy go to
120-130 as we suspect? Well, it is gradual. So cancer cures might add
six years, and the heart attack improvement another three years and the
reversal of the obesity epidemic perhaps a couple after that (and so
on).’

But the prospect of living so long is a miserable one when Alzheimer’s, arthritis and osteoporosis afflict us in our dotage.

However Mellon makes the distinction
between the ‘illderly’ of today and the ‘wellderly’, who will benefit
from the advances of tomorrow.

‘By the time we reach 100 there is going to be much higher quality of life,’ he claimed.

‘That transition from “illderly” to
“wellderly” will be driven by people like us who see all the problems of
old age that we don’t want to happen to us.’